When and why do IPO firms manage earnings?

Ewa Sletten (), Yonca Ertimur (), Jayanthi Sunder () and Joseph Weber ()
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Ewa Sletten: Boston College
Yonca Ertimur: University of Colorado at Boulder
Jayanthi Sunder: University of Arizona
Joseph Weber: Sloan School of Management, MIT

Review of Accounting Studies, 2018, vol. 23, issue 3, No 3, 872-906

Abstract: Abstract There is significant disagreement about whether, when, and why IPO firms manage earnings. We precisely identify the timing and motives behind earnings management by IPO firms. The period around an IPO is characterized by two events: the IPO itself and the lockup expiration. Both the raising of capital at the IPO and the exit by pre-IPO shareholders at lockup expiration create incentives for firms to manage earnings. To disentangle the effect of these events, we examine quarterly, rather than annual, abnormal accruals. We find no evidence of income-increasing earnings management before the IPO. However, IPO firms exhibit positive abnormal accruals in the quarter before and the quarter of the lockup expiration. Positive abnormal accruals are concentrated in less scrutinized firms and firms with high selling by pre-IPO shareholders. Moreover, we find that these accruals subsequently reverse and that such reversals contribute to long-run IPO underperformance.

Keywords: IPO lockup; Earnings management (search for similar items in EconPapers)
JEL-codes: G14 G3 G30 G32 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (12)

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DOI: 10.1007/s11142-018-9445-3

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